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Las Vegas New Resort Boom Fizzles

By Howard Stutz, Las Vegas Review-JournalMcClatchy-Tribune Regional News

January  25, 2009 - Wynn Resorts Ltd.'s glimmering $2.3 billion Encore opened on Dec. 22. Visitors gawked at the features and locals marveled at the lavish interiors. Analysts saluted the newest Strip mega-resort.

Las Vegas is always about the newest and latest. So what's next on the menu, they all ask?

MGM Mirage's massive $9.1 billion CityCenter is scheduled to open at the end of the year. Before CityCenter is unveiled, developers of the $1 billion M Resort are planning a March 1 grand opening at the southern end of the Las Vegas Valley. A hotel expansion at the Hard Rock Hotel might also open by December, but could be pushed into early 2010. The $2.9 billion Fontainebleau and the troubled $3.9 billion Cosmopolitan are geared toward openings next year.

After those events, things may quiet down in Las Vegas for much of the next decade.

Last year's economic meltdown sent several potential resort and luxury condominium developments to the junk pile. Credit markets dried up, leaving many projects without funding. No one is predicting that a new resort construction project will begin this year.

"You might see an announcement or two, but realistically, I don't think you will see a shovel in the ground for several years," Deutsche Bank gaming analyst Bill Lerner said.

Two years ago, Lerner authored an investors research report suggesting the gaming industry might have trouble hiring enough workers to adequately staff some 51,000 new hotel rooms expected to come on line by 2012.

Now, only about 19 percent of those planned rooms are being built.

"The demand by visitors slowed in 2008 and it has continued to slow," Lerner said. "Beyond what's under construction now, you're just not going to see anything new. The pipeline has shrunk considerably."

CityCenter covers 76 acres and is a one-of-a-kind development. The project includes as its centerpiece the 4,000-room Aria, a multiple-tower 61-story curved glass hotel-casino that was designed by noted architectural firm Pelli Clarke Pelli. There are nongaming boutique hotels, more than 2,400 high-rise residential units and a 500,000-square-foot dining, retail and entertainment district. MGM Mirage said Jan. 7 that it was delaying the 400-room Harmon until the end of 2010. The company also eliminated the condominiums at the Harmon.

Macquarie Capital gaming analyst Joel Simkins said Las Vegas will never see another CityCenter because of the development's magnitude and complexity. But he also thought it would be the middle of the next decade before the Strip even sees a new hotel-casino project.

Still, developers will float ideas.

"It's going to take years to digest the current capacity," Simkins said. "It seems that we might have hit critical mass, but that's not going to stop the banter about some outrageous project."

Brian Gordon, a principal in Las Vegas-based business advisory firm Applied Analysis, thinks the Strip has finally reached the point of absorption. The current developments need to be assimilated by the market before any new projects begin.

His theory has been posed for decades by analysts and experts looking at Las Vegas development.

The recession seems to have answered that question. For the first 11 months of 2008, gaming revenues on the Strip and Las Vegas visitation have both declined. The consumer isn't craving new gaming opportunities, which might just suit the current economic environment, where access to capital by casino developers may be fruitless.

"It's going to be very difficult for some projects to move forward until the fundamentals of the market shake out," Gordon said. "Until we understand how these latest projects perform, the credit markets are going to be hesitant to fund any new developments."

Moody's Global Corporate Finance took an overall look at the American gaming industry in December and wasn't impressed. The bond ratings service said the outlook for the casino business was negative over the next 12 to 18 months, which will affect the financing of future expansion plans.

Moody's Senior Vice President Keith Foley, who authored the report, said 2009 will be another difficult year for the Strip and the locals gaming market.

Foley predicted that casino operators will continue to drop room rates to lure gamblers. However, he thought visitors' gaming budgets would continue to shrink. In the meantime, Foley predicts cancellations will mount in the Las Vegas meeting and convention business, with companies sending fewer attendees than in the past.

"We expect that Las Vegas will retain its allure and stage a recovery at some point," Foley wrote. "All of the negative trends add up to significant margin pressure that will result in another year of declining earnings and deteriorating credit metrics."

The translation, according to analysts: New resort development is not needed.

Even some of the projects currently under construction could be affected.

Harrah's Entertainment postponed the completion date of a $500 million hotel tower expansion at Caesars Palace on Jan. 12, despite previous statements from company executives that the project would be finished.

In a statement, Harrah's officials said the demand for additional hotel rooms is just not evident in Las Vegas. The company will complete the tower, but not the rooms. Construction would resume once the need presents itself.

Fontainebleau developers said as recently as December that they are collecting names of customers interested in purchasing one of the more than 1,000 condominium units inside the under-construction $2.9 billion Strip project. However, the Fontainebleau has yet to invest any money toward a sales effort.

That may be a wise move, say analysts. Sales closings of completed condominium units at the Trump International, Allure, Panorama and Palms Place are far below projections.

Lerner said figures he tracked through the end of September showed Las Vegas condominium projects averaged three condo closings a month, down from what was expected to be 100 condominium closings a month. Analysts praised MGM Mirage for cutting 200 condominium units from its inventory at CityCenter when it shelved Harmon.

Simkins said the financing model for luxury condominium sales is broken.

"Condo buyers have a good memory and this last generation of condo sales won't be forgotten," Simkins said. "It's highly unlikely we will see this model of the condo-hotel at least for the next five years."

In addition to Harmon, two other projects were halted in midconstruction last year. Boyd Gaming Corp. stopped construction on its $4.8 billion Echelon project in August, some 14 months after the company broke ground on the Strip. Most analysts don't believe the casino operator will restart the development until 2010 at the earliest. Even then, Echelon will be at a much smaller scale and scope than what had been previously planned.

"This was one of the smartest decisions Boyd ever made," Simkins said. "They lost $500 million by stopping the project. If they had gone forward, they might have lost $5 billion and the company."

Las Vegas Sands Corp. stopped construction of its $600 million high-rise Strip condominium tower in November.

Lerner said other projects that have been halted in the preconstruction phase, such as MGM Mirage's joint venture development with Kerzner Holdings International on the north end of the Strip, may not be restarted until 2012 at the earliest.

The staffing needs for 51,000 new hotel rooms and condominium units in Las Vegas seemed like a daunting task two years ago.

Now, less than a quarter of those rooms will be built due to a sinking economy that shelved many proposed developments.

Operators of resorts expected to open this year and in 2010 could have their choice of job seekers, thanks to a statewide unemployment rate of close to 8 percent.

Several thousand casino workers have been the victims of layoffs and staff cutbacks.

Current data shows new hotel-casinos will attract job applicants.

Wynn Resorts Ltd. hired 5,000 workers for its $2.3 billion Encore, which opened in December. More than 100,000 potential employees filled out applications.

MGM Mirage is expecting similar figures as it begins the process of filling 12,000 jobs at its $9.1 billion CityCenter project. Company officials said they received more than 10,000 applications on Jan. 5, the first day applications could be filed online.

Even the 390-room, $1 billion M Resort, which is opening in March, received nearly 38,000 applications for 1,800 jobs.

Brian Gordon, a principal in Las Vegas-based business advisory firm Applied Analysis, said the number of potential new gaming jobs is obviously down from previous projections. But the available positions will still help the market.

"Employment growth is just one economic indicator, and even though the market has pulled back somewhat, the potential figures are still a positive sign," Gordon said.

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To see more of the Las Vegas Review-Journal, or to subscribe to the newspaper, go to http://www.lvrj.com.

Copyright (c) 2009, Las Vegas Review-Journal

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